Uncategorized

Smart Pricing: Fine-tuning price strategies

The term Smart Pricing is often associated with offering lodging and tourism experiences. It is used to recommend prices according to accommodation characteristics and automatically adjust them to daily, weekly and seasonal fluctuations in demand. The user can still set the minimum and / or maximum prices he is willing to offer, and include additional hosting restrictions.

This price elasticity approach can also be adopted by other businesses and financial scenarios, from banking to insurances. In fact, any service or product price can be estimated using data on market conditions if data is available.

What Smart Pricing actually does?

It is used to calculate and adjust prices to assure the maximum success probability (individually or quantitatively) and maximize profit.

What is required to use Smart Pricing?

A precise definition of service or product offered on the market, the limitations that apply when calculating the price and as many of the main influencing factors as possible. Abundant historical offer data, both successful and unsuccessful, that assure a strong and successful model.

How does Smart Pricing work?

Algorithm can be split into 3 components.

  1. Elasticity: This is a probability function estimating the probability that the customer is going to accept the offer. It is calculated using historical data with a suitable method.
  2. Profit evaluation: Formula for profit calculation given offer price and costs.
  3. Limitations: Minimum or maximum price, regulations, manual market adjustmens, …
 A machine learning method than connects these components into a holistic and useful model. 
 

Example – Bank Loans

Each bank has internal and external regulations that must be respected when preparing a personalized offer. Apart from that, the deal has several parameters that are determined during negotiations. Client asks for a specific amount and the bank offers a payment plan and interest rate. The client either accepts or rejects the offer, the latter meaning that the bank must re-prepare the offer. In theory, the bank could offer the most profitable plan at the start and then make tiny steps towards more affordable plan until the client accepts. Unfortunatelly, the client would be fed up with negotiations after a couple of tries and each offer would consume a bank employee for a couple of work hours. 

Smart Pricing is exactly the approach to solve such dilemmas and to find the optimal offer. Simultaneous optimization on multiple factors is also possible. For example, not optimizing only the interest rate, rather optimizing interest rate and initial depozit at the same time. A similar approach can be used by insurance company, real estate agencies, airlines, energy market, etc.